Friday, February 26, 2010

Inviting Jeff Sachs and Bill Easterly to Agree

I just sent this email to Jeffrey Sachs. He was at my alma mater on Wednesday speaking with students and faculty at the school about global development, Millennium Villages, the Earth Institute, and related topics. I had the chance to chat with him briefly at the end of his visit and to share with him the recently published special edition of Innovations on invention-led development.

The point of the message is to encourage Jeffrey Sachs and Bill Easterly to put aside their disputes on the lesser topic of aid effectiveness, and co-author an essay on a more important subject about which they appear to be in agreement: namely, what actually works in global development.
Dear Professor Sachs:

I have been greatly heartened to hear directly from you, and from Professor Easterly (cc'ed), your shared view that entrepreneurship and innovation are at the core of the process of economic development. The two of you may also a share the view (one that I hold most emphatically) that a development strategy focused on entrepreneurship and innovation is not equivalent to one that relies on markets as they currently exist. Rather it is one that considers interventions to markets strategically, with an appreciation for the reality that solutions in a rapidly changing world are not known, but are rather are evolving, and thus that success at scale begins with broad-based local experimentation combined with the resources, commitment, and alignment of incentives that jointly ensure support for approaches that work.

I believe that the discourse on global development would be greatly advanced if you and Professor Easterly were to participate together in an event, and jointly author an essay, focused not on the subsidiary subject of aid effectiveness, but rather on the core issue of what actually drives global development--a topic on which it appears your are largely in agreement. The event would be all the more interesting if you could be joined by actual entrepreneurs who have, in their own work, advanced global development--people like Iqbal Quadir and Mo Ibrahim. Should you be willing to participate in such an event, I am sure that you would find any number of willing hosts. For my own part, I can say that Innovations journal would be more than pleased to publish the jointly authored essay that the two of you seem well placed to author on this topic.

Best regards,

Philip Auerswald

Tuesday, February 9, 2010

Obama's Road Not (Yet) Taken

In reaffirming the greatness of our nation, we understand that greatness is never a given. It must be earned. Our journey has never been one of shortcuts or settling for less. It has not been the path for the fainthearted, for those that prefer leisure over work, or seek only the pleasures of riches and fame. Rather, it has been the risk-takers, the doers, the makers of things—some celebrated, but more often men and women obscure in their labor—who have carried us up the long rugged path towards prosperity and freedom.

—Barack Obama, President of the United States
Inaugural Address, January 21, 2009

One evening in the Fall of 2008—when Lehman Brothers had just failed and the entire financial system seemed to be on the edge—a former student of mine approached me as I was leaving the School of Public Policy building after teaching my microeconomics course.

The student had a question: What should the government be doing to help small business cope with the financial meltdown?

It turned out that, in this case, the matter was not just of academic interest. The student was a staffer on an key Congressional Committee, and had been tasked to tackle this specific question. In fact, the rest of the staff and committee members were so preoccupied with the rather significant job of making sure that the entire financial system didn't fall of a cliff that she—so far as I could tell from that discussion and subsequent exchanges—was the only person responsible for this task. And she had been given four days to come up with an answer.

The importance of her assignment was evident to both of us. After, as we were both aware, all net new jobs for two decades had come from small business. If small business didn't create new jobs to get the country out of the coming recession, there wasn't going to be any getting out of the coming recession.

That legislative session came to a close without large-scale targeted action to support entrepreneurs. We then had the inauguration of a new president. We had TARP. We had MASSIVE STIMULUS. (Both needed. Some elements of the stimulus—notably, smart grid investments--highly worthwhile.) But a concerted strategy for small business and entrepreneurs? Still nowhere in sight.

In the Spring of 2009 my George Mason colleague Zoltan Acs and I published an essay in The American Interest that took note of the need for government at all levels to make support of entrepreneurs an fundamental policy priority:
Economic growth, or its absence, is merely an indicator on the dashboard of our ongoing national journey. The engine that propels American capitalism forward is entrepreneurship; the fuel is opportunity; the work of foundations recycles the energy of society, making progress and widespread prosperity sustainable. Yet, just as a Tesla Roadster is no Model-T, 21st-century entrepreneurship derives from a formula far more complex than the “1 percent inspiration and 99 percent perspiration” once cited by Thomas Edison. Far-sighted government policies are an essential element within this formula. Political leadership must do more than celebrate the “risk-takers, the doers, the makers of things” who create opportunity and extend the reach of prosperity. It must act in partnership with private foundations to ensure the existence of an environment conducive to their efforts.
Again, months passed. The President's agenda continued to be dominated by exigencies of the moment (Afghanistan) and justifiable legislative priorities (in particular, health insurance reform). But "risk-takers, the doers, the makers of things" that the President celebrated at his inauguration remained sidebars on the President's policy agenda.

And then, in the past three weeks, a change: The Obama Admistration started not only talking about small business and entrepreneurs, but actually proposing specific initiatives to help them continue their role as featured participants in the creation of American prosperity.

This is good news. It could get even better. For example, the Obama admistration could embrace wholesale the outstanding set of recommendations the Kauffman Foundation has advanced recently to drive innovation and advance prosperity through entrepreneurship.

Why do all this? Because what the past America and the next America have in common is entrepreneurship, innovation, and a nation's defining determination to find the practical solutions needed to maintain momentum "up the long rugged path towards prosperity and freedom."

Would Americans everywhere embrace such a story?

Here's hoping the Obama administration helps us find out.

Friday, February 5, 2010

When the Blue Screen of Death Really Means Death

The Blue Screen of Death. Even Mac users know what this means. It means that you have a problem. The problem may be small, or it may be big. You may have lost some time, or you may have lost a piece of your soul.

Why the seeming inevitability of the Blue Screen? Because computer code is complex. New programs interact with old programs, and with the operating system, in ways that are all-but- impossible to anticipate. The only way to find out for sure what will work and what won't is to try things out. (Ergo the concept of the Beta version.) When you try things out, sometimes they don't work right. When that happens... BSoD.

Now here's how another computer user experienced the Blue Screen of Death (from today's NYT):

It was a Saturday afternoon, April 19, 2008, and [Guadalupe] Alberto, a 77-year-old former autoworker, was driving her 2005 Toyota Camry. Within blocks of her home, witnesses told police, the car accelerated out of control, jumped a curb and flew through the air before crashing into a tree.

Mrs. Alberto was killed instantly, leaving her family stunned at how such an accident could happen to someone who was in good health, never had a speeding ticket and so hated driving fast that she avoided taking the freeway.

Her car was not among the millions of Camry models and other Toyotas recently recalled for sticky accelerator pedals. And it also did not have floor mats at the time, which were part of a separate recall.

Instead, the crash is now being looked at as a possible example of problems with the electronic system that controls the throttle and engine speed in Toyotas.

Mrs. Alberto was not aware she was using a computer when she left her home. But she was. Any automobile built in the last decade has computing power comparable to... a personal computer. In today's world, computing power is ubiquitous. The water from your faucet? The power in your home? These and more infrastructure services are brought to you by "supervisory control and data acquisition" systems--referred to by professionals as "SCADA" systems--the category of software that runs the background programs for everyday life in industrialized countries. (If you're interested in that sort of stuff, you might want to check out this... and if you're really a glutton for punishment, this.)

Recognizing that society's operating system = computers + the built environment + people, the BSoD itself becomes a ubiquitous metaphor. The Challenger and Columbia crashes. The Northeast power blackout. Katrina. All BSoD phenomena in one way or another.

Now let's get back to the Blue Screen we started with--the one on your computer. How do you deal with it? We all know that the only way to deal with the BSoD is to expect it to happen, to prepare accordingly, and to get good at recovering rapidly. In other words, you need to be resilient. After all, what good is weeks, months, or years of efficient, productive work if it all gets lost in one Blue Screen. Ask Akio Toyoda.

The 20th century was all about growth. Not the 21st. For communities, businesses, and nations, resilience is the quality that matters most.

Speaking of Scarcity...

Bill Easterly has a blog post today titled "Who gets the Last Seat on the Plane? Why Aid Hates Economics." He's right again. But his argument could be extended. For example, there is another scarce resource not mentioned in this post whose allocation matters for development: The talent of development economists, like Easterly.

Take, for example the Aid Watch blog itself, whose motto is "Just asking that aid benefit the poor."

Now (bear with me for a moment here!) let's say you're back in the historical paradise of planning, namely the Soviet Union. Everyday, you have to eat the same old cr&p food...

You're sick of it, but you can't find a way out.

Then one day, a leader arrives, with a banner that reads "Just asking that the food not suck!" You cheer! You hoist your comrade on your shoulders! At last, you are fighting back against the system. The battle for better cafeteria food is on!!

But what is the opportunity that is missed here? What is the thing you really need, that you're not going to get from the "Just asking that aid benefit the"--I mean, the "Just asking that the food not suck" campaign?

What you're not getting, and what you really need, is some new restaurants!! Yes, that would be just the thing. Some options. You would like another place to go to eat.

There is a general rule here: What really drives change isn't protest, but genuine competition driven by consumer choice. (Back to dining for a moment: Think about food in airports twenty-five years ago, if you were alive then. All Sodexo monopoly. Uniformly terrible and expensive. Now, with entry and competition for licenses, the food in the airport is at least as good as what you get outside the airport.)

Entry (or threat of entry) doesn't have to be by entrepreneurs in order for it to induce beneficial change. In the U.S., the most significant new entrant in the aid business in the last decade has been the Department of Defense. At his big event at Brookings last month, Easterly ridiculed the assertion by Secretary of State Clinton that the DoD's mission could be aligned with development, saying:
Her big think point was that we can merge defense, diplomacy, and development. And that’s probably one of the worst ideas I’ve heard in my career as a development economist.
Well, what does he think is more likely to stir USAID from its longstanding torpor: (a) the Aid Watch blog, or (b) the threat of being rendered obsolete by the Pentagon? I'd put my money on (b).

So instead of "just asking that aid benefit the poor," how about just asking for some new restaurants?

Tuesday, February 2, 2010

Randomized Out-of-Control Trials

Listening to the audio for the recent "What Works in Development" meeting at Brookings, I couldn't help but notice the moderator's (no need to name names here) telling insistence on using the term "randomized clinical trial" in place of the generally preferred "randomized controlled trials." Either way, the message is the same: "Put on your lab coat, Sonny. . . It's time to do some people experiments!"

Now I'm going to let the experts--and they were in abundance at Brookings last month--address the finer points of external validity (for the uninitiated, this reflects the researchers ability to answer the question "Well, so what?") and other challenges to the claim of RCTs to being the big thing in development.

What interests me is what RCTs might do to entrepreneurship. And it's not a pretty picture.

To set the stage, consider this observation on the process of development from very-smart-guy Mancur Olson:
Because uncertainties are so pervasive and unfathomable, the most dynamic and prosperous societies are those that try many, many things. They are societies with countless thousands of entrepreneurs who have relatively good access to credit and venture capital.
Power and Prosperity, pp. 188-189

What works in development, according to Olsen, is experimentation. Why? Because we don't know what works. Such a view, earlier articulated by Hayek and other, finds a contemporary expression in Bill Easterly's now-familiar (to folks that follow this sort of stuff) distinction between "searchers" vs. "planners" in development. For those of you inclined to economic theory (anyone? ... hello?) here's my version.

Now Bill Easterly is also known as an advocate for accountability in aid. He has concerns about the potential overuse of RCTs. However neither he nor the colleagues represented in his recent book with Jessica Cohen, (mis)titled "What Works in Development," have much of a notion of what else might really work better.

All good so far.

But here's a problem.

No entrepreneur ever used randomized controlled trials to create a business. None. Ever.

OK, I don't know that for sure. But please find me one... and you know I'm not talking about a biotech startup that pulls off a clinical trial to test for safety and efficacy. I'm talking about using a randomized trial to build the business itself... the entrepreneurship part of entrepreneurship.

Development driven by entrepreneurship (also known as "development") is comprised of randomized out-of-control trials. That would be--yes!--the opposite of randomized controlled trials.

Why does this matter? Stop and think. In what U.S. industry do clinical trials dominate? That would be pharmaceuticals. And in what industry are markups higher, and barriers to entry greater, than they are in the pharmaceuticals industry? The answer to that question is, of course, no other industry. When it comes to persistent oligopoly, pharma beats them all.

A very big part of the reason for this is that large-scale clinical trials are expensive. But you can't sell a drug without them. (For mostly good reasons, I might add, in the case of medicines.) So even successful biotech companies have had great difficulty breaking into the business of conducting their own clinical trials; instead they often partner with "Big Pharma" on the last mile of drug development.

Now I'm not saying we should abolish the Food and Drug Administration--though, like the U.S. Patent and Trademark Office, it is in serious need of some tender loving care . . . alternately administered with a potential kick in the groin or two.

No, I'm just asking this question: Is the increasingly widespread use of RCTs a move in the direction of an FDA for development--if not in a hardwired, institutional sense (unlikely, unless you think that the World Bank is in danger of becoming relevant again) then instead in the sense of customs, standards, and expectations.

I can see it now... A well-meaning RCT acolyte popping up on NPR to talk about the Aravind Eye Hospital and saying
Well, yes, it is true that they have cured two million people of blindness in thirty years. But we don't have any real evidence of their effectiveness. How many of the people treated at Aravind would have ceased to be blind without the surgery they received? Was the Aravind approach really better than alternatives? And did it really have an impact on economic growth in the regions in question? The only thing I can say without proper evaluation is that this is a nice retirement project. But I can't tell you that it is effective development.
Am I making this up?

Will not "higher standards of evidence" not only distort resource allocation (if outcomes are improperly defined) but also create barriers to entry? Won't this favor incumbents, 0r outside consultants flown in to do the work? Might not all of these "secondary" effects more than outweigh any benefit gained from "better" standards of evaluation?

Furthermore, might we not do better by studying the work of those exceptional entrepreneurs--like Aravind's founder, Dr. Govindappa Venkataswamy--who do a particularly remarkable job in creating social value, and putting our resources into supporting the nascent efforts of others like them, using an approach to evaluation that is actually appropriate to entrepreneurship?

Instead of putting our faith in randomized controlled trials whose beneficial impacts are uncertain, shouldn't we bet on the process of randomized out-of-control trials (a.k.a. entrepreneurship and innovation) that has been the very definition of development and growth pretty much everywhere in the world for five centuries?

Randomized clinical... that is, controlled trials work fine in public health, but for development, they could well be the cure to aid ineffectiveness that turns out to be worse than the disease.


@montero funny how entrepreneurs define by creating and academics define by quoting and correcting each other.

me: guilty as charged
Having for five years taken great joy in editing a journal featuring narratives by entrepreneurs addressing global challenges, I can relate to what Montero's saying here. Academic one-upmanhip isn't even interesting to academics. How can it possibly be interesting to anyone else?

But, in the immortal words of Peter Finch, IMAHAINGTTIA!

Take the alleged "debate" over what works in development, featuring the inimitable (please don't try) Jeffrey Sachs and his Big Apple neighbor, William Easterly. Why would the two of them be adversaries on the topic of what works in development? After all, they both know what works and what's more, they agree!

But not only don't they listen to each other, they don't even listen to themselves. (For you folks watching at home: Yes, that is pathetic.)

Here's the Jeffrey Sachs version:
I believe that the single most important reason why prosperity spread, and why it continues to spread, is the transmission of technologies and the ideas underlying them. (The End of Poverty, p. 41)
Here's Easterly:
Historically, industrialization arose in initially poor countries which have since become rich, with the common theme of a heavy reliance on both domestic and international market opportunities and decentralized private entrepreneurship.
Now only two things need to happen to connect the dots between these two statements.

One is to pull Sachs out of whatever Secretariat meeting he happens to be in at the moment to remind him that human beings are responsible for the "transmission of technologies" and furthermore that the most adept among us at this task actually have a name: technology entrepreneurs. These people do not wear lab coats (for the most part), they do not work at the United Nations, and they do not know Bono.

The other thing that needs to happen here is to drag Bill Easterly away from friendly chats with fellow economists for long enough to give the topic of aid effectiveness a rest (perhaps permanently) and start spending some time and attention studying what matters most in development.

And, again, what was that?

Entrepreneurs. Technology. Innovation. These have been the drivers of increased prosperity for the past 500 years. They continue to be the drivers of increased prosperity today.

Jeff and Bill: If you don't agree with this statement, why do you yourselves--like pretty much all other growth and development economists--use variants of it in your own writings?

And if you do agree with this statement, then why don't either of you pay any serious, scholarly attention to entrepreneurs, technology, and innovation?

What is the matter with you people!